Monday, July 7, 2008

Where is the money going to come from?

Lehman came out today with a statement that FNM and FRE need a total of $75 billion in cash infusion to get through their current mess. I wonder how much Freddie and Fannie think Lehman needs. It isn't a matter of who has the $75 billion, but who is going to need Fannie and Freddie to produce more lending besides the Congress of the US? This isn't a $75 billion investment. The investment has already been made and it was clearly insufficient.

I continue to be a deflationist in the teeth of what appears to be raging inflation. All the stuff that is going up isn't necessarily stuff that the US is going to jump off the bridge if it goes up. Between oil and gas, the US produces near 20 million BPD equivalent, now selling for $2.8 billion a day. How many countries in the world have a $1 trillion economy, much less in one category? We haven't even touched coal or hydropower or atomic, just oil and gas. Corn is going up? Also a big US crop, in fact the US is by far the largest corn producer in the world. In any case, in the scheme of things, consumption of these products aren't rising much if at all in the US, only in the emerging world.

One thing is clear. The US consumer in his entirety has run out of the capacity to borrow more money. This doesn't mean all consumers are tapped out, but the ones that add to their balances every month are. A guy that charges up his card and pays it off every month is a convenience debtor, not a debtor in reality. Then again, how much monetary growth over the past 15 years can be attributed to these pay as you go debtors? How much of the current money supply can be attributed to the $3o billion a month extra being spent on gasoline alone? Figure half the people put their gas purchases on a card, due primarily to the fact that most don't carry enough cash with them to fill up entirely, there is $15 billion on average that exists just because gasoline prices are higher for those that pay their balances monthly. Those that can't pay monthlyare on their way to becoming prior consumers, as are those that are trying to live within their means and the pump is replacing their other expenditures.

Remember, the CRB is hitting China a lot harder than it is the US. It is hitting Europe especially hard as well and the weak dollar has to be hitting their economy especially hard. How does China sell a weak US economy with a low US dollar more goods? REMEMBER China has to get dollars to buy oil?

You guys that read my stuff around the web can point to this as evidence I have called a high in the price of oil. It might get to $150, as is widely expected, but the fibonacci's are lining up with the recessions and the drop in demand and all other items, as the $400 billion hot check is mopped up and put back in the bank as capital infusions. China won't be repeating their expansion of the prior few years any time soon. Neither will Dubai once they realize that they paid top dollar one more time. This is all going on due to the flow of dollars in their direction, not because they have some kind of economic miracle going on. Think they are going to abandon the dollar and let the Europeans fleece them next? No, they are going to go with what brung them as I think Yogi Berra used to say (might as well be Yogi, as he said about everything else).

We have heard rumors of recessions and estimates of recessions, but we haven't had a broken financial system recession like this one that is coming since the 1930's. The inflation that happened in the 1970's along with the bad recessions weren't because the financials were broken, but because the demand for capital credit was so high that interest rates had to shift with inflation. What are our capital interest rates today? Even before the Fed loosened, capital rates had trouble running above 5% on risk free money and 6% or so on top credit lines. This is market, not rigged money. What will it be when there is no demand to build box retailers and speculate on stock in China and India or buy GOOG or 10 houses to rent and become a millionaire in 3 years?

The problems are multifold. America needs a pay hike and they can't get a pay hike because the jobs are going overseas if Americans get a pay hike. So, we have fat cats that get their money out of small cats that are going into debt to line the pockets of the fat cats who went long the ABX then short the ABX and now pretty much have no ABX to fleece the small cats who are out of credit and if they aren't subprime, can't sell their small home any more to someone that is so they can move closer to the fat cats. So one group pays off their debts and pulls in their horns because they can't keep spending money like drunken sailors and keep their penthouses in Manhattan on Central Park. The other group can't borrow any more and loses their job at Walmart because they can't spend and borrow any more at Walmart. The autoworker who has been building SUV's loses his job because they don't need that many people to build the mopeds that the poor guy who had a subprime auto loan on an SUV is now driving due to the fact the repo guy got the SUV he can't afford to put gas in any more and can't sell.

I have understood for years that we couldn't have a real bear market without some kind of credit mess. At one time, I supposed that the bear market would cause the credit problems, but instead I have come to understand that it is the expansion of credit that causes the bull market and the credit problems that result and with the credit game over so is the bull market. The 1970's, even though inflationary and a bear market, really were a bull market after the inflation really started and as it subsided, took off and carried the bull to amazing heights. The problem was the necessary switch in money, as was the switch in the 1930's. What is going to be the switch this time that saves the market from deflation?

One think I am beginning to notice is the restaurants are starting to look bare and the DFW area is a better economy than most. The shine is off Starbucks. It will soon be off the cellphone game, the PC game and the AAPL game. We are about to see a decline in the number of Visa cards for the first time in history and a lot of people are going to be forced to cash. I think the fact that we are seeing some growth in cash outstanding from the Fed is evidence that folding money is being carried for the purpose of buying gasoline in ever greater dollar quantities as many don't have credit any more. The price of gas will decline, but with the decline won't go the availability of credit. If anything, it will cause a drop in cash balances.

I think we are about to see an amazing decline in credit availability. Kudlow for once had some guys that were hitting the nail on the head. Joe Bataglia (sp) and another guy who don't agree too often were right on the money while Kudlow, Dennis and some other guy were in just pretend the price is higher a few years from now and all will be okay, as there won't be any write downs. The point is that the banks have to have capital to expand the money supply and I doubt many want to go to jail for covering up insolvency for long. Come clean now and they are all standing under the same mess, a subprime game that is no ones fault because the rating agencies said the risks were good. The world is standing still while it runs in place faster and faster.

2 comments:

What I see looks exactly like a textbook "Stagflation". The economy continues the stagnate with the DOW dropping from 14000 to almost 11000 and at the same time massive food and energy index inflation without the accompanying salary inflation that would maintain demand levels. "Textbook" stagflation, regardless of how much they deny it. They had $450bil of debt auctions since Christmas 2007 and now on July 1st they have another one for $75bil. And then today, July8th I look at the front page of the Drudge and they are talking about bailing out more. It doesnt stop!